4812-9683-1013.2

July 21, 2015

Submitted Electronically: e-OED@dol.gov

Office of Regulations and Interpretations 

Employee Benefits Security Administration

Attention: Conflicts of Interest Rule

Room N-5655

Office of Exemption Determinations

Employee Benefits Security Administration

Attention: D-11712 and D-11713

U.S. Department of Labor

200 Constitution Ave., NW

Washington, D.C. 20210

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement 

Investment Advice (RIN 1210-AB32); Proposed Best Interest Contract 

Exemption (ZRIN 1201-ZA25); Proposed Class Exemption for Principal 

Transactions in Certain Debt Securities between Investment Advice 

Fiduciaries and Employee Benefit Plans and IRAs (Z-RIN 1201-ZA25)

Ladies and Gentlemen: 

On behalf of the Bond Dealers of America (“BDA”), I am pleased to submit this 

letter in response to the Labor Department’s notice of proposed rulemaking (RIN 1210-

AB32) (the “Notice”) and its associated proposed exemptions from prohibited 

transactions (ZRIN 1201-ZA25), requesting comment on a proposed definition of a 

fiduciary under the Employee Retirement Act Income Security Act of 1974, as amended

(“ERISA”), a proposed prohibited transaction exemption related to certain principal 

transactions in debt securities (“Principal Transaction Exemption”), and the proposed 

Best Interest Contract Exemption. BDA is the only DC based group representing 

middle-market securities broker-dealers and banks focused on the U.S. fixed-income 

markets, and we welcome this opportunity to present our comments on the Notice.

While BDA applauds the Department’s efforts to strengthen investor protections, 

it echoes many of the concerns expressed by the investment community regarding the 

proposed expanded definition of fiduciary and proposed prohibited transaction 

exemptions. Below, we briefly discuss our belief that the disparate standards of care that 

the Department’s rulemaking and proposed exemptions create for broker-dealers, the 

additional costly burdens on broker-dealers and the increased limitations on asset classes 
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that broker-dealers can recommend to their customers will have an overall negative 

impact on the ability of investors to diversify and obtain adequate returns on their 

investments. BDA supports a more harmonized multi-agency approach to developing 

standards of care for broker-dealers and outlines its recommendations for the Labor 

Department and Securities and Exchange Commission (“SEC”) in achieving this 

harmonization. BDA will then specifically focus on the negative impact that the 

proposals will have on the investors’ ability to invest in municipal bonds and certain 

other investment classes. Finally, BDA will address the Department’s proposed 

requirements for the principal transactions that would have an adverse effect on investors, 

broker-dealers, and market liquidity. 

BDA Supports a Rule-Based, Harmonized, Approach and Its Vigorous 

Enforcement

BDA appreciates that the U.S. retirement investment landscape has undergone a 

long-term transition to widespread investments through IRAs and 401(k) plans and the 

need for protecting investors, especially less sophisticated investors. However, BDA 

cannot support the proposed rule or the associated exemptions in their current form. BDA 

believes the proposed fiduciary definition and exemptions represent the wrong approach 

for improving investor protection regulation and will ultimately limit investor choice, 

retirement portfolio diversity, and investment returns. The proposals would increase 

existing investor confusion and regulatory complexity by creating differing standards of 

care for advisers and investors. Unlike the Department’s principle-based approach, BDA 

supports a rules-based, harmonized approach in which the Labor Department and SEC 

work together to develop a uniform best interest standard of care for retirement and nonretirement investment accounts. Additionally, BDA strongly favors vigorous enforcement 

of the recommended rules-based, uniform, best interest standard of care so that bad actors 

are effectively sanctioned and deterred from wrongful conduct.

BDA Supports a Uniform, Harmonized Best Interest Standard of Care

BDA supports the Labor Department’s efforts to devise a rule that best protects 

retirement investors. However, the expansive nature of the proposed definition of 

fiduciary would eliminate the brokerage model for municipal bonds and many other asset

classes. Consequently, broker-dealers would be effectively precluded from providing

valuable investment recommendations and general investment education to investors 

while earning commission-based compensation.

BDA believes the brokerage model must be protected so that investors are able to 

retain the ability to receive low-cost, transaction-based services and recommendations. 

Applying a trust law standard to a brokerage account would trigger an ongoing duty to 

monitor investments in retirement accounts. The cost of this type of monitoring is 

incompatible with the low-fee, transaction-based brokerage model that many retirement 

investors currently benefit from. BDA urges the Department to ensure that any future best 

interest standard of care proposal that would be applicable to recommendations made by 

advisers to their retirement brokerage customers contains explicit language that states 

broker-dealers do not have an ongoing duty to monitor investments. 
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BDA urges the Labor Department and the SEC to work together to craft a uniform 

best interest standard of care for retirement and non-retirement investors that builds upon 

existing suitability and compensation rules and FINRA Rule 2010 which states, “A 

member, in the conduct of its business, shall observe high ethical standards of 

commercial honor and just and equitable principles of trade.” 

Recommended Principles for Developing Uniform Standards of Care

BDA recommends the following principles as a guide to the Labor Department 

and the SEC’s efforts in harmonizing the agencies’ rulemaking. BDA believes that 

developing a harmonized best interest standard of care for broker-dealers will best serve 

the needs of all investors and meet the goal of strengthening the investor protection 

regime.

• Fee Disclosure: Require firms to develop policies and procedures to govern the 

clear disclosure of investment fees and inherent conflicts. 

o Ensure that the receipt of fees and commissions does not trigger a 

violation of the best interest standard of care thereby restricting the 

flexibility of investors to receive advice and chose from a wide variety of 

securities that may suit their investment needs or restrict the provision of 

financial advice in general.

o Require broker-dealers to make policies and procedures readily available 

for inspection by the Labor Department and SEC.

• Conflicts of Interest Disclosure: Disclose material conflicts to investors and 

obtain acknowledgement and consent related to a recommendation.

o Require disclosure and consent at account opening.

o Prominently display the conflict disclosure on the website.

o Require disclosure and confirmation of consent annually through 

company-based web disclosure, or, at the client’s request via the delivery 

of hard copy material. 

• Principal Transactions Disclosure: Allow advisers to recommend securities out 

of inventory only if accompanied by disclosure to the customer.

o Disclose the conflicts generally at account opening, specifically referring 

to trading out of inventory.

o Disclose the conflicts pre-trade by settlement on a principal transaction

and require pre-trade consent by the investor.

• Preserve Investor Choice: Harmonization should not simply apply an Advisers 

Act standard of care on broker-dealers. As former Representative Barney Frank 

wrote in a May 2011 letter to the former SEC Chair Mary L. Schapiro, “If 

Congress intended the SEC to simply copy the ’40 Act and apply it to 

broker-dealers, it would have simply repealed the broker-dealer exemption—an 
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approach Congress considered but rejected.”1 The joint efforts of SEC and Labor 

Department should allow investors to retain the flexibility of having both feebased and commission-based accounts. 

• Cost-Benefit Analysis. Any harmonized rulemaking should be subject to a 

rigorous cost-benefit analysis, including a harmonized effort to assess and 

anticipate the full scope of technological changes on dealer systems, especially for 

smaller dealers. 

Specific Policy Comments on Prohibited Transaction Exemptions

BDA’s specific policy comments and recommendations related to the Notice will 

focus on the impact of the Proposed Best Interest Contract Exemption and Proposed 

Class Exemption for Principal Transactions in Certain Debt Securities between 

Investment Advice Fiduciaries and Employee Benefit Plans and IRAs on broker-dealers 

and retirement investors in the U.S. fixed-income markets. 

Proposed Best Interest Contract Exemption

Exclusion of Municipal Bonds from the Exemption’s Coverage will Harm Investors

The Best Interest Contract Exemption, necessitated by a broader definition of a 

“fiduciary,” is designed to allow current compensation methods, including broker-dealer 

commissions, to continue without triggering the prohibited transaction penalties. 

However, the exemption only applies to a very limited subset of assets that unnecessarily 

excludes tax-free and taxable municipal bonds. In fact, it limits fixed income investments 

covered by the exemption to certain corporate bonds, agency debt securities, and U.S. 

Treasury bonds. Municipal debt securities can only be obtained if they are an asset class 

held by a mutual fund or collective trust. The Labor Department requested comments on 

additional asset classes that are common investments for retail investors and should be 

included within the scope of the exemption. BDA believes that for the following reasons 

municipal bonds should be covered by the Best Interest Contract Exemption.

• Superior Credit Strength of Municipal Bonds. The restriction on covered bond 

obligations would deny investors the benefits of investing in specific municipal 

bond issuances—an asset class with a lower historical default rate than identically 

rated corporate bonds.2

• Common Retail Investments. Currently, retail investors hold 75% of municipal 

bonds—directly or through mutual funds. Municipal bonds are common and 

stable enough to warrant a class exemption rather than be available only if the 

advisor obtains an individual prohibited transaction exemption. A class exemption 

																																																							 1 Letter from Barney Frank, Ranking Member , U.S. House of Representatives, Committee on Financial Services, to 

Mary L. Schapiro, Chairman of the Securities and Exchange Commission (May 31, 2011), 

http://media.advisorone.com/advisorone/files/ckeditor/Barney%20Frank%20Letter.pdf. 2 Robert Slavin, The Bond Buyer, “Muni Default History Poses a Ratings Riddle,” May 6, 2015, Accessed July 21, 

2015. Available at: http://www.bondbuyer.com/news/markets-news/muni-default-history-poses-a-ratings-riddle1072901-1.html
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for municipal bonds should cover at the very least participants and beneficiaries, 

IRA owners and small retirement plans. However, BDA would like to point out 

that the Best Interest Contract Exemption should cover larger participant-directed 

ERISA retirement plans that cover more than 100 participants.

BDA acknowledges the Department’s stated rationale for the limited list of assets,

namely, ensuring that a retirement investor has access to the asset classes that would 

ensure the construction of a diversified portfolio and that are “relatively transparent and 

liquid.” BDA believes that the best approach to achieve the goal of developing a 

retirement portfolio that would serve the best interests of a retirement investor would be 

to allow retirement investors to transact in the widest variety of assets. In addition to, and 

indeed regardless of the foregone tax benefits of investing in a tax-free municipal bond in 

a tax-advantaged retirement account, there will be instances when the investment makes 

sense for a retirement investor from the standpoint of capital appreciation. Additionally, 

there will be instances where a retirement investor may want to invest in a tax-free 

municipal bond because the yield on that municipal bond is higher than a comparable 

corporate bond yield, even before computing the taxable equivalent yield of the 

municipal bond. Ultimately, the new fiduciary rule and the limited nature of the Best 

Interest Contract exemption would end the brokerage model for municipal bonds. This 

would deny investors the opportunity to invest in municipal bonds in anticipation of 

rising bond prices or on a comparative yield basis. This would defeat the very purpose of 

the proposal to protect the best interests of investors. 

The Exemption will Naturally Incentivize Advisers to Recommend the Lower-Cost 

Investment in Order to Avoid Legal Liability. 

The proposed language of the Best Interest Exemption states that advisers would 

be required to provide investment advice “without regard to the financial or other 

interests” of the adviser or institution. The ambiguity of this language—especially the 

meaning of “without regard”—may naturally preference certain lower-fee bond funds, 

which include ongoing fees, and low-fee exchange-traded funds (“ETFs”), that expose 

investors to significant market and liquidity risks, over investments in individual 

corporate and municipal bonds. While fees to enter into a transaction in an ETF or certain 

bond funds may be low, there are other costs and risks that the Department must 

acknowledge. Furthermore, the Department must acknowledge the benefits of 

investments in a single municipal or corporate credit relative to an ETF or fund in a rising 

rate environment. A more holistic analysis that includes market and liquidity risks of 

ETFs or a relative value analysis of bond funds versus investments in individual 

fixed-income securities from a long-term return perspective is needed. 

The overall result of the current structure proposed in the exemption is that 

broker-dealers will be naturally inclined to assume that recommending a lower fee 

investment is the best way to comply with the exemption, despite the fact that a single 

bond would likely be in the investor’s best interest over the total holding period. This 

would deny investors of the ability to chose from the widest variety of suitable 

investments that could meet the variety of investment objectives that investors with 
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different ages, incomes, and risk tolerances have. This is the clear downside of having a 

rule where brokerage compensation is explicitly defined to be a violation of the 

customers’ best interest. 

Proposed Class Exemption for Principal Transactions in Certain Debt Securities 

between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs

BDA Believes that Exclusion of Municipal Bonds and Other Asset Classes from the 

Exemption would Harm Retirement Investors

BDA agrees that conflicts of interest may arise when a broker-dealer recommends 

that an investor purchase a security out of a dealer’s inventory (i.e., “principal 

transactions”). Similar to the Best Interest Contract Exemption, the Principal Transaction

Exemption limits classes of securities that broker-dealers may sell to retirement investors 

out of their inventory. The exemption and the fiduciary definition would result in an 

outright prohibition on principal transactions involving taxable and tax-free municipal 

bonds, CDs, unit investment trusts (UITs), and mortgage-backed securities (“MBSs”). 

BDA believes that with appropriate disclosures of the inherent conflicts of interest at 

account opening in addition to specific transaction-based disclosures about the conflicts 

associated with a dealer trading in principal capacity the Labor Department’s concerns 

could be addressed efficiently while benefiting retirement investors. 

Prohibition assumes that the conflicts that arise due to principal transactions are 

unable to be mitigated via disclosure. This logic is contrary to the design of the 

Department’s exemption and current regulations applicable to broker-dealers. This 

exemption will negatively impact market liquidity for the non-exempt assets. 

Furthermore, if this standard were to be applied broadly—across retirement and nonretirement accounts—it would drastically harm fixed market liquidity and would impair 

the ability of a dealer to use its balance sheet to provide liquidity in the service of their 

retail customers. 

Providing active liquidity in debt instruments is a fundamental broker-dealer 

activity. When a dealer buys a debt instrument into inventory from an investor the price 

paid is based on the potential to sell the asset at a higher price in the future. The 

compensation to the dealer is not guaranteed and limited and governed by current brokerdealer rules that apply to reasonable compensation, fair pricing and markups, and best 

execution. If the Department proceeds with this proposed rule in its current form, 

liquidity providers will be hesitant to provide liquidity for the benefit of investors and the 

marketplace generally. Ultimately, the lack of liquidity would harm the very group of 

retirement investors that the proposals aim to protect.

Prohibiting Underwriters from Selling Debt Securities to Retirement Investors as part 

of Primary Offering Will Harm Investors and Issuers

Retail investors, including retirement investors, are active participants—as 

suppliers of market demand—in primary offerings of debt securities. The proposed 

exemption prohibits the participation of retirement investors in primary offerings. This 
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will negatively impact investors and may increase interest rates for issuers, especially 

smaller issuers and municipal issuers, whose primary issuances would be impacted by 

less demand from retirement investors. By excluding retirement investors from 

transacting in a primary issuance, the proposal would require retirement investors to 

transact in the secondary market—after the primary issuance—when the market price to 

purchase bonds may be higher than the issue price. 

The Requirement to Obtain Two Comparable Quotes for a Principal Transaction 

Would Hamper the Ability of an Investor to Attain the Most Favorable Price

The Department’s exemption requires an adviser to get two contemporaneous 

market quotes from an unaffiliated institution and to transact at a price that is at least as 

favorable as a market quote for a non-principal transaction. Clearly, the purpose of this 

specific part of the proposal is to ensure that a retirement investor gets a fair price for a 

fixed income investment. Unfortunately, the proposal is an overly prescriptive 

duplication of the effective, existing best execution regulations that achieve this precise 

goal and of proposed regulations to disclose same day, retail-size, principal-trade mark 

ups and mark downs on customer confirmations. 

The proposal endeavors to create an unnecessarily complex regulatory regime for 

investor-broker interaction. A better approach would be to rely on existing best execution 

standards. The existing FINRA and MSRB rules allow for brokers to execute transactions 

in a wide variety of fixed income securities irrespective of market conditions and allows 

for differences in execution price based on differences in trade sizes—something the 

Department’s standard does not do. 

Market liquidity ebbs and flows. In a volatile market, when an investor wants to 

buy or sell a bond, transacting quickly and at the most favorable price is critical. 

Unnecessarily slowing the trading process down by requiring a broker to identify two 

bids or offers on the identical security would hamper the ability of an investor to attain 

the most favorable price. This would especially be true for securities issued by smaller 

corporate and municipal issuers that trade less frequently and are issued in smaller 

quantities than larger corporate bond issuances. BDA believes a uniform, harmonized, 

and rules-based approach based on FINRA’s best execution standards is the most logical 

standard for the Department to follow. 
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* * * *

In conclusion, BDA understands the need for the Department to fortify the rules 

applicable to retirement investors and investment recommendations. However, BDA 

believes that the Department’s approach is not in the best interest of investors, especially 

investors with minimal invested funds. As stated above, BDA urges the Department to 

act in concert with the SEC in order to best protect all investors by designing a 

harmonized best interest standard of care and expanding the universe of permissible 

investments.

Thank you again for the opportunity to submit these comments.

Sincerely,

Michael Nicholas

Chief Executive Officer